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Fitch Affirms Fenghui Leasing at 'B'; Outlook Stable
June 30, 2017 / 2:22 AM / 5 months ago

Fitch Affirms Fenghui Leasing at 'B'; Outlook Stable

(The following statement was released by the rating agency) TAIPEI, June 29 (Fitch) Fitch Ratings has affirmed Fenghui Leasing Co., Ltd's (Fenghui) Long- and Short-Term Issuer Default Ratings (IDR) at 'B'. The Outlook is Stable. Fitch has also affirmed the senior unsecured notes issued by Silver Sparkle Limited (Silver Sparkle) at 'B' with Recovery Rating of 'RR4'. Silver Sparkle is a special-purpose vehicle (SPV) set up to issue the offshore notes on behalf of Fenghui. Fenghui is a Chinese domestically registered leasing company that started a leasing business in 2009. The company provides equipment leasing (77% of total receivables at end-1Q17) and entrusted loans (23%) to clients across China. KEY RATING DRIVERS IDR, Senior Notes and Recovery Rating Fenghui's IDR is constrained by its high risk appetite and weak funding and liquidity, compared with higher-rated peers. Growth in the company's balance sheet has outpaced the sector average, and exceeded its internal capital generation. Fenghui relies on funding from asset-backed securities, trust and asset management products, which are susceptible to volatility in China's liquidity conditions, and the asset quality of the underlying assets. The company is operating with a negative short-term funding gap, although funding diversity has improved in the past year. Fenghui's franchise is modest amid the fragmented and competitive leasing market in China. The management team's track record with Fenghui is short and has yet to be tested through economic cycles. The company has delivered some incremental improvement in its risk-management framework, including installation of an independently functioning risk control officer system. Nonetheless, Fenghui's concentration risk remains significant. At end-1Q17, its 10 largest clients represented 146% of the company's equity. The company's strong asset growth has resulted in a decrease in its impaired loan ratio; however, its concentrated portfolio and unseasoned loans have yet to be tested in an economic downturn. Fenghui has relied on capital injections from its shareholders to support its growth. The company's rapid asset growth reduced its equity-to-assets ratio to 15.9% at end-1Q17 from 23.4% at end-2015. Shareholders announced they would inject an additional CNY2 billion in capital to Fenghui in late 2016. They injected CNY0.5 billion at end-2016, and are likely to allocate the remaining CNY1.5 billion in 3Q17. 1Q17 pro-forma equity ratio stood at 21.4% after factoring in the capital injection. The ratings are supported by the company's high profitability, improving funding diversity, and its moderate use of encumbered assets. However, the company's high profitability may not fully reflect the inherent risk in Fenghui's rapid asset growth and may not be sustained in an economic downturn or during periods of market stress. The guaranteed notes issued by Silver Sparkle constitute general, unsecured and unsubordinated obligation of Fenghui and will rank pari passu with all other existing and future unsecured and unsubordinated obligations of Fenghui. The notes are rated at the same level at Fenghui's Long-Term IDR, and carry a Recovery Rating of 'RR4', which reflects average recovery prospects. RATING SENSITIVITIES IDR, Senior Notes and Recovery Rating Sustained improvement in Fenghui's funding and liquidity profile, and improved risk appetite, which may be manifested in reduced asset growth, could lead to a rating upgrade. Deterioration in liquidity and asset quality, including a high encumbered balance sheet and heightened refinancing risk, may lead to a rating downgrade. As the senior notes issued by Silver Sparkle are guaranteed by Fenghui, the ratings on notes would be sensitive to the same factors that drive the guarantor's IDR. In addition, the ratings on the notes would also be sensitive to changes in the Recovery Rating, which is in turn sensitive to changes in the size of issuance relative to guarantor's unencumbered assets and the underlying recovery prospects of these same assets. Contact: Primary Analyst Shirley Hsu Associate Director +886 2 81757606 Fitch Australia Pty Ltd, Taiwan Branch Suite 1306, 13F, 205, Tun Hwa North Road, Taipei, Taiwan, Secondary Analyst Katie Chen Director +886 2 8175 7614 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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